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NAFTA’s saga so far: A guide to trade, the talks and Trump

Where we are on trade now

  • The Trump administration is threatening new tariffs that could devastate Canada's auto sector, while the NAFTA negotiators' standoff over auto manufacturing threatens to drag on the talks even further.
  • U.S. President Donald Trump ordered his Commerce Secretary to review car and truck imports using an obscure piece of U.S. trade law concerning national security. The review could take months before a decision on tariffs, ramping up pressure on Mexico, Canada and other U.S. trading partners.
  • "Rules of origin" for auto manufacturing remain one of the most contentious parts of the new North American free-trade agreement. Mexico is opposed to U.S. demands to make auto companies source 40 to 45 per cent of content from factories that pay US$15 an hour. Mexico's workers earn an average of about US$4 an hour, and the Mexican negotiators fear the U.S. wage measures would favour American and Canadian manufacturers.
  • But Mexican labour activists and workers told The Globe and Mail that pay is only part of a bigger problem. Mexican workers have to struggle with 60-hour weeks, supervisors demanding sex from female employees and companies saying no to allotted holiday time.
  • Congress’s May 17 deadline for a new NAFTA came and went with no sign of a final deal, though Canada is making a last-ditch effort to reach an agreement, sources with knowledge of the talks told The Globe. Here’s an explanation of why that deadline mattered and why talks on most NAFTA issues now threatening to drag on into 2019.

What is NAFTA?

The 1994 agreement – an expanded version of a Canada-U.S. free-trade deal from 1988 – created what was then the biggest free-trade area in the world. It removed barriers to the flow of goods and labour between Canada, the United States and Mexico, under the oversight of an independent dispute-settlement process.

Flashback: President Clinton’s original signing of NAFTA into law in 1993

Canada – the world’s largest purchaser of U.S. goods – saw its exports to U.S. markets soar. The Americans are less dependent on NAFTA than Canada is, The Globe’s Steven Chase explains: Trevor Tombe, a University of Calgary economist, calculates that there are only two American states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output.

There are only two U.S. states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output, according to University of Calgary economist Trevor Tombe.

MURAT YÜKSELIR/THE GLOBE AND MAIL (SOURCE: TREVOR TOMBE, UNIVERSITY OF CALGARY)

For years, the Canadian government has repeated its claim that Canada is the most important foreign market for 35 U.S. states. This map is posted on a government website that promotes trade.

MURAT YÜKSELIR/THE GLOBE AND MAIL (SOURCE: STATSCAN)

This map, using data retrieved from the U.S. Census Bureau, shows Canada’s share of total U.S. exports, by state. It shows that, for a majority of states, less than 30 per cent of total exports go to Canada.

MURAT YÜKSELIR/THE GLOBE AND MAIL (SOURCE: U.S. CENSUS BUREAU)

What has NAFTA done for us? Four views from three countries

United States: In this Tennessee town, NAFTA’s a dirty word

United States: In red states, not everyone is anti-NAFTA

Mexico: A pivotal moment for a fragile country

Canada: Tough trade: The lessons of NAFTA

Why change NAFTA?

The politics of free trade have undergone a remarkable U-turn since NAFTA, and the FTA before it, came into being.

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In 1988, Canada had a Progressive Conservative prime minister, Brian Mulroney, who fought an election over the Canada-U.S. trade deal with the Liberals opposing it. He also had pro-free-trade Republican allies in the White House, with Ronald Reagan and later George H.W. Bush, backing him up.

Contrast that with 2016, when protectionism turned into a defining theme of the U.S. election. Both presidential candidates opposed the Trans-Pacific Partnership, a trade deal even bigger than NAFTA, but the Republican Mr. Trump also singled out NAFTA and promised to erect a wall along the U.S.-Mexico border. In his inauguration speech, Mr. Trump promised an “America first” attitude to trade,immigration and foreign affairs.

What does Trump want a new NAFTA to look like?

In its initial months, Mr. Trump’s inner circle strongly disagreed about what demands to make in NAFTA renegotiations. There was a moderate camp, including Treasury Secretary Steve Mnuchin and Mr. Trump’s son-in-law Jared Kushner, that wanted to enhance NAFTA and make cross-border business easier for corporations, and a protectionist camp, including former chief strategist Steven Bannon. The protectionist camp has been more dominant in recent months, especially since the March departure of economic adviser Gary Cohn.

Out of that conversation came an initial list of 100 broad, sometimes vaguely worded demands that the U.S.Trade Representative’s Office released on July 17. Some highlights include:

  • Reducing the U.S. trade deficit within NAFTA, which could mean increasing U.S. exports or reducing Canadian and Mexican imports.
  • Scrapping NAFTA’s dispute-resolution panels, which have sometimes ruled in Canada’s favour on softwood lumber and other trade issues.
  • Using “Buy American” provisions to bar Canadian or Mexican firms from seeking U.S. government contracts.
  • Making Canadian and Mexican intellectual-property rules more “similar to that found in U.S. law.”

The Trump administration’s most contentious NAFTA demands began to take shape at the fourth round of talks in Arlington, Va. Demands include:

  • Dairy: The U.S. wants an end to Canada’s supply-management regime for dairy and poultryproducts.
  • Sunset clause: The U.S. wants the new NAFTA to expire in five years unless the member countries agree to renew it.

Decoding Trump’s NAFTA doctrine with The Art of the Deal

Could Trump really pull the U.S. out of NAFTA?

The metal menace

The Trump administration has tried to gain leverage in the NAFTA talks with heavy tariffs on steel and aluminum. On March 8, Mr. Trump introduced tariffs of 25 per cent and 10 per cent, respectively, on the two metals, citing the need to protect domestic supply of the metals for U.S. military needs. For now, Canada and Mexico are exempted from the tariffs, but Mr. Trump explicitly linked that exemption to NAFTA: “If we’re making a deal on NAFTA, this will figure into the deal and we won’t have the tariffs on Canada or on Mexico. … I have a feeling we’re going to make a deal on NAFTA.”

The tariffs‘ effect on cheap Chinese metal imports could benefit Canada in the short term, Globe steel reporter Greg Keenan explains, but it could also have unpredictable effects on U.S. manufacturing and global tariffs on other products as the result of a trade war.

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Canada’s contentious trade issues

Dairy supply management

Canada’s dairy, egg and poultry industries are governed by a supply-management system that dates back to the 1970s. It has three parts, The Globe’s Barrie McKenna explains: Fixed prices, production quotas and tariffs to protect Canadian producers from foreign competition. The dairy tariffs – which run up to 270 per cent, and which Canada tightened in 2016 to include unfiltered milk products used to make cheese and yogurt – have been a thorn in the side of other dairy-producing nations like the United States, Australia and New Zealand.

Mr. Trump’s interest in the dairy file began with events in Wisconsin, a major dairy-producing state, The Globe’s Joanna Slater explains. Local processor Grasslands Dairy Products Inc. wrote a letter to Wisconsin farmers recently saying it would stop buying the farmers’milk because of new Canadian classification rules for a product used in cheese making, which would give companies an incentive to buy domestically instead of from the United States. A letter-writing campaign to Mr. Trump – who narrowly won the state in the 2016 election – and congressional efforts by Wisconsinite House Speaker Paul Ryan made the dispute into a national issue, and at an April 18 event in Kenosha, Wisc., the President vowed to challenge Ottawa on its dairy policy:

In the months that followed, the Trudeau administration spoke in strong defence of Canada’s dairy and poultry sectors. Then, in the fourth round of NAFTA renegotiation talks, the Trump administration put its demands on the table: Phase out all tariffs associated with dairy and poultry supply management over 10 years. Canadian negotiators flatly rejected the demand, according to sources familiar with the talks.

More reading

The milk war: How a letter in Wisconsin set off a trade dispute between the U.S. and Canada

How butter's surge in popularity led to Trump's attack on the Canadian dairy industry

Softwood lumber

Feuds over softwood lumber have been a recurring part of Canada-U.S. relations since the 1980s. Their root cause is U.S. industry’s contention that Canada unfairly subsidizes its lumber by providing cheap access to public land. It’s led to a cycle of American punitive action, followed by trade cases mostly won by Canada, and then a compromise settlement.

The fifth and most recent lumber war was set off on April 24, when U.S.Commerce Secretary Wilbur Ross said his agency would impose new anti-subsidy duties on Canadian softwood. The initial duties added up to about 20 per cent,but a second wave of anti-dumping duties in late June brought that total to about 27 per cent. The U.S. International Trade Commission upheld the duties in a unanimous final ruling on Dec. 7, arguing that Canadian shipments of softwood lumber were hurting American producers.

The Trudeau cabinet discussed an aid package for the softwood industry in May, but waited for provincial input from a special working group before announcing $867-million in aid on June 1. Ottawa gave the industry loan guarantees, help finding new markets for its products, employment-insurance support for workers and money for new initiatives from Indigenous forestry producers.

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In November, the government also asked for a binational panel to settle the tariff dispute, using NAFTA’s Chapter 19. (Read more below on what Chapter 19 is.)

Chapter 11 vs. Chapter 19

Two of NAFTA’s dispute-resolution mechanisms are being targeted for major changes. How is Chapter 11 different from Chapter 19? Here are the basics.

Chapter 11: Government vs. businesses

Imagine a scenario where Country A passes a law that a corporation based in Country B feels would hurt its business. If Country B Inc. sues Country A’s government, the case goes to arbitration by an ad-hoc panel of lawyers appointed by the NAFTA countries, in a process set out in NAFTA’s Chapter 11. The idea is that these panels would be more independent than if the case were settled by Country A’s courts. But critics say the lawyers appointed to these panels risk conflicts of interest because of their business activities back home.

Canada has faced more Chapter 11 lawsuits than any other country – about 40 so far – most of which challenge its environmental protections and natural-resource policies. A 2015 study by the Canadian Centre for Policy Alternatives found Canada was the target of more than 70 per cent of all NAFTA investor-state claims since 2005, and study author Scott Sinclair warned that the problem was getting worse:

Canada has now been sued more times through investor-state dispute settlement than any other developed country in the world.

One of Canada’s goals in the NAFTA renegotiations is to overhaul Chapter 11 so that, instead of ad hoc panels, there would be set rosters of judges appointed by the NAFTA countries.

Chapter 19: Government vs. government

Whereas Chapter 11 lays out how companies can sue governments, Chapter 19 is for trade feuds between governments. If Country A imposes trade duties on Country B that B’s government thinks are unfair, B can appeal to an independent panel rather than seeking redress in Country A’s courts, which could presumably be biased in Country A’s favour.

Canada likes this arrangement because it has used it to successfully challenge American duties on softwood lumber and other products. But the Trump administration thinks the independent panels are a violation of U.S. sovereignty, and it wants U.S. courts to handle trade disputes.

In July, a senior official told The Globe that scrapping the independent panels is a “red line” Canada will not cross, and the Trudeau government would walk away from NAFTA talks if the U.S. won’t budge. Mr. Trudeau wouldn’t confirm the part about potentially walking away, but said he considers the panels “essential” to a new deal.

What about Mexico?

Building barriers (both physical and economic) with Mexico has been Mr.Trump’s stated goal since he began running for president; in the 2015 speech announcing his campaign (the one where he said “rapists” and criminals were coming across the U.S.-Mexico border), he said Mexicans were“laughing at us” and “killing us economically.” Now that Mr. Trump is president,Mexican President Enrique Pena Nieto is in a tight spot. He is facing domestic pressure to stand up to Washington about the wall that Mr. Trump wants Mexico to pay for, which Mexico refuses to do. But Mr. Pena Nieto also has to avoid alienating a major trading partner and being shut out of the new North American trade regime.

For Mexico, the biggest issue of the NAFTA talks is auto manufacturing. The United States wants new requirements that 40 to 45 per cent of auto content in the NAFTA zone be made at factories that pay US$15 an hour or more, which is more than four times what the average Mexican worker makes. Mexico’s resistance to the auto proposal, which they fear would drive manufacturing jobs away from the country, has kept the NAFTA negotiators at loggerheads.

Mexican politics has played a major role in the timetable of NAFTA talks, because voters will choose Mr. Pena Nieto’s successor in a July 1 presidential election. Negotiators have faced tough decisions about whether to wrap up talks with the current administration or wait to see how things proceed with the new one.

Who’s deciding NAFTA’s future?

Here’s some more reading on key people to watch on the trade file.

The Canadian side

The American side

The Mexican side

  • Ildefonso Guajardo, Economy Minister
  • Luis Videgaray, Foreign Minister
  • Kenneth Smith Ramos, chief NAFTA negotiator

How could this affect me?

Uncertainty over NAFTA’s future has already had far-reaching effects on the Canadian economy, from the dollar to the energy sector – and, ultimately, to your personal finances. Here’s some more reading on what might be coming.

Economy and personal finance

Under Trump's NAFTA proposal, Canadians could see steep increase in tax-free online shopping

Canadian exporters must look to U.S. or lose business in a ‘Buy American’ world

Oil and gas

Canada gives Trump administration warning on pipeline exclusion

Premier Rachel Notley pushes Alberta as part of Canada’s broader U.S. approach

Manufacturing and technology

NAFTA revamp threatens success of U.S. auto sector

Michael Geist: What would a digital-economy-era NAFTA mean for Canadians?

Agriculture

The NAFTA snack: Why free trade is vital to food production

What about the rest of the world?

A new North American trade regime would be only part of larger changes in America’s, and Canada’s, role in the world – and with NAFTA’s future in question, Canada is looking for other sources of trade revenue.

  • Asia-Pacific: Mr. Trump’s decision to withdraw the United States from the Trans-Pacific Partnership apparently killed the trade deal, but 11 countries gave it a new lease on life with China’s help. In January, 2018, after months of diplomatic back-and-forth about what a new TPP should look like, high-level talks in Tokyo produced a revised version that the 11 countries are hoping to officially approve by March.
  • Europe: The European Union, Canada’s second-largest trading partner, finalized a trade deal with Canada even broader in scope than NAFTA: the Comprehensive Economic and Trade Agreement, which provisionally took effect on Sept. 21. On Sept. 18, British Prime Minister Theresa May said her administration and Mr. Trudeau’s had agreed that Canada and Britain should strike a new bilateral trade deal once Britain’s exit from the EU is complete,and CETA should be used as the template for it.

More reading

China now the unlikely champion of free trade in the Trump era

What’s next?

NAFTA talks are now a more or less continuous process: The scheduled rounds of talks were abandoned months ago, and the national trade leaders have met several times in Washington this spring, continuing to work toward a deal.

If Canada and Mexico don’t give in to the Trump administration’s demands, Mr. Trump has threatened to pull the plug on NAFTA to force their hand. Under Article 2205 of NAFTA, which allows any country to withdraw after giving six months’ notice; the process may not lead to a definite pull-out, but it gives the U.S. the option to leave.

With reports from Adrian Morrow, Bill Curry, Steven Chase, Robert Fife, Greg Keenan, Barrie McKenna, Evan Annett, Reuters and The Canadian Press

Images via Reuters, Associated Press, Canadian Press, iStockphoto

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